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A brave new world in tax transparency: CRS in China, Hong Kong and Taiwan

2018-10-17 08:33 Tag:Top Stories

Increasing cross-border business and investment has made the holding of assets overseas through offshore accounts increasingly common. This has become a new tax battleground for businesses and governments. Charles Kinsley, Henry Wong, and Eva Chow look at the latest developments regarding these efforts in China, Hong Kong and Taiwan.

The background to the existing wave of global initiatives in the exchange of tax information space goes back to an initiative lauchned in the US in 2014. The US Congress, driven by concerns that taxpayers had achieved sophisticated means of investing offshore to potentially avoid US taxation, enacted the Foreign Account Tax Compliance Act (FATCA) effective from July 1 2014. The FATCA, as a unilateral reporting mechanism, required the identification and reporting of US taxpaers by foreign financial institutions (FFIs), being institutions located outside of the US, to the US Internal Revenue Service(IRS). This has since evolved further , through intergovernmental agreements (IGAs) with other countries, into a more bilateral-based system. The FATCA imposes a penal withholding tax of 30%on US-sourced withholdable payments made to FFIs and other foreign entities that fail to comply with the disclosure requirements.

In response to the need for having a global mechanism for the periodic exchange of financial account information, the OECD formulated the automatic exchange of information (AEOI) standard to standarise the approach on information exchange between participating jurisdictions. The AEOI standard comprises two parts: the model competent authority agreement (MCAA) and the common reporting standard (CRS). The MCAA, which can be bilateral or multilateral, is the operational document on how to conduct the automatic exchange of information among tax authorities in different jurisdictions. It also provides the legal basis for tose countries or jurisdictions that wish to participate in the exchange (as will be noted later in this chapter, China has opted for a multilateral approach). The CRS stipulates the identification requirements and reporting obligations of financial institutions(FIs), as well as the related requirements and procedures for collecting and reporting information of foreign tax-resident individuals and entities to domestic tax authorities.

Since the release of the AEOI standard, it has attracted attention and support globally and more than 100 countires/jurisdictions have already committed to it. More than 50 “early adopter”countries/jurisdictions implemented the AEOI standard with effect from January 1 2016，while others(“late adopter” countries) have generally implemented the standard with effect from January 1 2017. It is worth noting that while early adopters had their first information exchange in September 2018. It should be noted that the US is not yet a CRS participant country.

CRS in China

Since the beginning of 2016, the China State Administration of Taxation (SAT) has conducted several rounds of consultation on the Chinese version of the AEOI standard with various regulators and representatives from large FIs in China. This was to ensure that the unique regulatory and operating environment of the Chinese financial industry would be carefully considered when implementing the AEOI standard.

On May 9 2017, the SAT along with the Ministry of Finance (MOF), People’s Bank of China (PBOC). China Banking Regulatory Commission (CBRC), China Insurance Regulatory Commission (CIRC) and China Securities Regulatory Commision (CSRC) jointly released the “Measures on the Due Diligence of Non-resident Financial Account Information in Tax Matters”, Announcement (2017) No. 14 (Announcement 14). Announcement 14 stipulates the principles and procedures for FIs established in China to follow, and to identify any reportable non-residents of China that hold financial accounts with the institutions and to collect the required financial account information for the Chinese authorities. Announcement 14 came into force on July 2017 (instead of January 1 2017 like most other late adopter jurisdictions of the CRS) with the first online registration deadline being December 31 2017, followed by an annual reporting deadline of May 31 of the following year.

The formal implementation regulations for Announcement 14 have not as yet been released by the SAT. However, we note that the PBOC has released draft consultation guidance for implementation of the CRS rules for the banking sector. For other financial sectors, no such guidance is available yet. A draft consultation on the reporting rules has also been circulated among large FIs in China. It is expected to be released towards the end of 2017 or early 2018. A public consultation on the implementation and reporting rules might be released as well.

Highlights of China’s CRS regulation

Announcement 14 has seven chapeters and 44 articles that provide an overall framework for the due diligence requirements for both newly opened accounts and pre-existing accounts, compliance, reporting, and supervision requirements.

Financial institutions established and operating in China are required to conduct the due diligence procedures to identify any reportable non-resident account holders as well as the controlling persons of passive non-financial enterprises (passive NFEs), then report the required financial account information to the Chinese tax authorities. Overseas branches or subsidiaries of Chinese FIs, as well as overseas investment funds raised by Chinese firms are excluded from applying the Chinese CRS rules but should follow local CRS rules in their respective countries/jurisdictions where they operate.

Where an account is identified as reportable, the FI should collect and report the account holder’s name, address, tax resident country(region), taxpayer identification number (TIN) issued by the resident country (region), place of birth and date of birth (where applicable), account number, year-end balance of the account, as well as income received by that account to the Chinese tax authorities.

On the same date that Announcement 14 was released to the public, the SAT also set up a special AEOI website in Chinese to provide an introduction to the Chinese CRS rules, the legal framework of the OECD’s AEOI standard, reference materials including the taxation laws on Chinese tax residency for both individuals and enterprises, the statutory format of China’s TIN system and FAQs.

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